Arbitrage & Rebate
Know the Rules
About Investing Proceeds of Tax-Exempt Bonds for School Districts
By Kyle Harding
Partner
Chapman and Cutler LLP
Kevin Heid
Managing Director
Stifel, Nicolaus & Company, Incorporated
Tax Exempt Bonds (“TEBs”) lower borrowing costs for state and local governmental units, including Illinois school districts. In general, TEBs pay less interest than taxable bonds of the same credit and maturity. Interest payments received on TEBs are excluded from federal income taxation. Investors are willing to accept lower interest payments if their after tax return is the same (or higher). While federal tax exemption offers lower interest rates, Issuers are required to comply with federal tax rules imposed on TEBs.